The U.S. Treasury is warning there could be “catastrophic” economic effects worldwide if Congress does not increase the country’s borrowing limit in the coming days so the United States does not default on its financial obligations.

As the U.S. approaches its current $16.7 trillion debt ceiling, the Treasury issued a report Thursday outlining the calamity it says could occur if it runs out of money to pay the country’s bills, including interest on money the U.S. has borrowed overseas.

“A default would be unprecedented,” Treasury said, “and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

The country’s government is already in the third day of a partial shutdown in a spending impasse between President Barack Obama, a Democrat, and his Republican opponents in Congress. Mr. Obama said Congress needs to act quickly to avert a new crisis over the debt ceiling, which the country could reach on October 17.

“You know the United States is the center of the world economy. So, if we screw up, everybody gets screwed up. The whole world will have problems, which is why generally nobody has ever thought to actually threaten not to pay our bills. It would be the height of irresponsibility.”

Mr. Obama and Speaker John Boehner, leader of the Republican-controlled House, are locked in a stalemate over government spending priorities. But Boehner has been telling Republican colleagues in recent days that he will do whatever is necessary to avoid a default, even if he needs votes from Democratic lawmakers to help raise the borrowing limit.

The U.S. and Denmark are the only democratic countries in the world that have imposed a debt ceiling, with other nations choosing to borrow what they need to finance their operations without a prescribed limitation. A business professor at the University of Michigan, Erik Gordon, told VOA that the U.S. has attempted, without much success, to curb its spending.

“It can’t discipline itself without spending money. It spends money like a drunken sailor. So Congress imposed a debt ceiling in an attempt to impose some discipline on itself, by saying, you can spend money, but not so much that you breach this ceiling.”

The U.S. debt ceiling has been increased more than 100 times in the last century, sometimes rather routinely, other times after extended debate, with lawmakers from the political party that does not control the White House often accusing the country’s leader of reckless spending.

Mr. Obama now says he wants Congress to increase the borrowing limit without negotiating over the country’s spending and taxation policies with his Republican opponents. But as a U.S. senator, Mr. Obama voted against an increase in the debt ceiling when a Republican, George W. Bush, was president.

The chief executive of the huge U.S. investment bank Goldman Sachs, Lloyd Blankfein, met with Mr. Obama at the White House this week along with other key banking executives. Blankfein said it is imperative that the United States does not default on its financial obligations.

“There’s precedent for a government shutdown. There’s no precedent for default. We are (or were) the most important economy in the world. We’re the reserve currency in the world. Payments have to go out to people – if money doesn’t flow in, then money doesn’t flow out. So we really haven’t seen this before, and I’m not anxious to be a part of the process that witnesses it.”

Michigan business professor Gordon says no one knows what would happen if the U.S. were to run out of money to pay its bills and the debt ceiling is not increased.

“Nobody knows what will happen if it’s actually breached, because it’s never come to that. But the fear is that it will destroy the country’s status as the safe harbor for investments, that you won’t know whether your U.S. government bonds will be paid on time or not. That’s virtually unthinkable.”

He said even the threat of the U.S. defaulting would have “huge effects worldwide” on investors’ confidence in the government’s securities.

Treasury SecretaryJacob J. Lew said Congress needs to pass a debt-ceiling increase by Oct. 17 or the U.S. will be “dangerously low” on cash and risk defaulting on its payments.

“On the 17th, we run out of our ability to borrow, and Congress is playing with fire,” Lew said on “State of the Union” today. “If they don’t extend the debt limit, we have a very, very short window of time before those scenarios start to be played out.”

“If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default,” Lew said. “There is no option that prevents us from being in default if we don’t have enough cash to pay our bills.”

Little Cash

Lew is projecting that the U.S. will exhaust its “extraordinary measures” to stay under the $16.7 trillion federal debt limit no later than Oct. 17. At that time, the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days.

That “is a dangerously low level of cash, and we’re on the verge of going into a place we’ve never been, not having cash to pay our bills,” Lew also said on NBC’s “Meet the Press” today. “Even getting close to the line is dangerous.”

A one-week shutdown will probably shave 0.1 percentage point from economic growth, according to the median estimate of economists surveyed by Bloomberg, with the damage accelerating if the closing persists. The shutdown costs at least $300 million a day in lost output at the start, according to IHS Inc. (IHS), a Lexington, Massachusetts-based global research firm.

Treasury said breaching the debt limit could freeze the credit markets, weaken the dollar, push U.S. interest rates up, and reverberate on global markets, causing a crisis similar to the one in 2008, according to an Oct. 3 report.

So far, the financial-market response to the political gridlock has been muted.

The yield on the benchmark 10-year Treasury increased two basis points last week, trading between 2.66 percent and 2.58 percent. While the yield is up from the record low of 1.38 percent in July 2012, it’s below the average of about 6.7 percent since the early 1980s, the start of the three-decade long bull market in bonds.

Investor Outlook

BlackRock Inc. (BLK)’s Laurence D. Fink and Pacific Investment Management Co.’s Bill Gross said on Oct. 3 that the budget standoff will be resolved without a debt default.

The U.S. budget deficit in June was 4.3 percent of gross domestic product, down from 10.1 percent in February 2010 and the narrowest since November 2008, when Obama was elected to his first term, according to data compiled by Bloomberg from the Treasury Department and the Bureau of Economic Analysis.

In an Oct. 4 letter to Senator Orrin Hatch, a Utah Republican, Lew declined to say how much Congress should raise the debt limit.

“Congress must choose how long to extend the debt limit,” Lew wrote. “A longer period of certainty would help protect our economy from future political brinksmanship.”

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